Broker Class

Terms

An industrial firm that anticipates a move into a new area requires precise data concerning the economic base of the community and its demography.

True

A "buyers' market" indicates all of the following except

HIGH DEMAND. A sellers' market indicates high demand.

Which one of the following statements is true regarding the characteristics of real estate?

ITS MARKET CONDITION IS SELDOM IN BALANCE WITH SUPPLY AND DEMAND. Real estate investments are usually in one cycle or another.

Of the following approaches to value, which one reflects the actual price that a knowledgeable buyer will pay?

MARKET VALUE. Market value is the price a knowledgeable buyer will pay for a property.

From a rational point of view, an investor in real estate must consider all of the following analysis aspects except

PRIDE. Yield, risk and value are important attributes to consider when investing in real estate. Pride is not as important.

Real estate investments have all of the following advantages except high

LIQUIDITY. Lack of liquidity is a disadvantage of real estate investments.

To increase the use of leverage when buying a real estate investment is to

INCREASE IN RISK. Increased leverage raises the potential risk.

Supply and demand theory indicates that if both supply and demand increase at the same rate, prices will

REMAIN CONSTANT. When the supply and demand for real estate go up or down at the same rate then the market is in equilibrium.

When slum properties start attracting investors, they are entering a period of

INTEGRATION. When slum properties reach a point of increasing value for renovation they are in a period of integration.

Because of the fractured quality of the market, a real estate investment is frequently considered highly

ILLIQUID. Without a uniform market real estate is often hard to sell.

Real estate investments should be considered first and foremost from the viewpoint of the

ECONOMIC SOUNDNESS OF THE PROJECT. This is the most important consideration for a real estate investment.

Corporations are formed to own real estate for all of the following reasons except

TO AVOID DOUBLE TAX ON PROFITS. Regular corporations cannot avoid a tax on profits at the corporation level and again at the stockholders' level on dividends.

A father, mother, and daughter own a property in joint tenancy. The daughter sells her interest to a friend for cash. How is the ownership changed?

ALL THREE PARTIES NOW OWN AS TENANTS IN COMMON. When a joint tenant sells his or her interest the new entity chages to tenants in common.

Which of the following is not an attribute of a limited partnership?

EACH PARTNER TAKES AN ACTIVE ROLE IN MANAGEMENT. In a limited partnership the investors do not have a role in management.

Tenancy in common includes which of the following?

UNDIVIDED OWNERSHIP. Tenants in common include undivided ownership.

A living trust usually evolves into a/an

TESTAMENTARY TRUST. A living trust usually reverts to a testamentary trust upon the death of the grantor.

An S corporation

LIMITS THE PERSONAL LIABILITY OF ITS SHAREHOLDERS. An S corporation is designed to protect its shareholders from any personal liability.

Participants in a general partnership usually take title as which of the following?

TENANTS IN COMMON. Partners usually take title to a property as tenants in common.

How many units can be built on an apartment site 220 feet wide by 385 feet deep, where the zoning requires a total side-yard setback of 20 feet, a front yard of 25 feet, a rear yard of 10 feet, a height limit of two floors and

20 UNITS. The number of units allowed by the zoning code for this particular lot is 20 units.

In a market analysis, the occupancy rates for a particular type of property should be compared to the

COMMUNITY'S OCCUPANCY FACTOR FOR THAT TYPE OF PROPERTY. Investigate the entire community to determine an occupancy rate for a specific type of property.

All of the following statements about residential subdivision restrictions are true except they

ARE ENFORCEABLE ONLY AGAINST THE ORIGINAL HOME OWNER. Subdivision restrictions are enforceable against all the subdivision owners.

A mixed-use subdivision describes which of the following?

DIFFERENT BUT COMPATIBLE DEVELOPMENTS IN ONE DESIGNATED AREA. Mixed-use developments integrate many land uses in one subdivision.

When analyzing the site for a new commercial investment project, all of the following factors must be considered except the site's

FERTILITY. The feasibility of a commercial lot site does not require that it be fertile land.

A feasibility analysis is primarily designed to provide an investor with information appropriate to

MAKING AN ECONOMICALLY RATIONAL INVESTMENT DECISION. A feasibility analysis is designed to help an investor make a rational decision.

When examining the building included in a proposed commercial investment, all of the following factors must be considered except the property's

SQUARE FOOTAGE. Square footage is considered in the financial analysis not in the physical analysis.

The Environmental Protection Agency (EPA) establishes guidelines for the prevention of all of the following except

PROPERTY ACCESSIBILITY. The EPA does not regulate access to property.

Fundamentally, a planned unit development (PUD) is designed to

ELIMINATE SIDE YARDS FOR MORE EFFICIENT LAND USE. A PUD eliminates side yard set-back requirements.

At a 12 percent yield requirement, what is the present value of an annual income stream to be received at the rate of $5,000 at the end of each year for five years, $10,000 for the next five years, and $15,000 for the final five years, plus a net cash rev

$71,874.75. The present value of a property generating $5,000 net income for five years, $10,000 for five years and $15,000 for five years plus the net sale of the property at the end of the fifteenth year for $150,00, at a 12 percent discount, equals $71

An investor in the 28 percent bracket purchases a residential income property for $350,000 with a $100,000 cash down payment. The loan for $250,000 is payable at 10 percent interest-only for ten years. The property generates $50,000 annual gross income. I

THIS IS A NEGATIVE CASH FLOW PROPERTY. This investment does not generate a negative cash flow.

At a 12 percent yield requirement, what is the present value of a $10,000 net annual income stream to be received at the end of each year for 15 years plus the cash value reversion from the sale of the property at the end of the 15th year for $150,000?

$95,514. The present value of a property generating $10,000 annual net income at the end of each year for 15 years, plus the net sale price of the property for $150,000 at the end of the 15 years, discounted at 12 percent, equals $95,514.

Most financial analyses of investment property profit potentials are based on

EDUCATED GUESSES. Most financial analyses are based on a number of educated guesses.

To be eligible for a VA loan guaranty, the borrower would have to be a qualified veteran or recruit, or a spouse of a veteran who is missing in action or who died of a service-connected injury or illness while in the service. T or F

TRUE

When property is pledged as collateral for a loan, three basic forms are utilized to establish the desired lender-borrower relationship, depending on the area of the country: the note and mortgage, deed of trust, and contract for deed. T or F

TRUE

A default occurs when there is a breach of one or more of the conditions or terms of a loan agreement.

TRUE

Mortgage brokers differ from mortgage bankers in that they bring together borrower and lender, confirm the loan arrangement, charge the borrower a placement fee for their services, and move on to the next transaction.

TRUE

In the absence of a due-on-sale clause, existing financing is assumable by the sellers.

FALSE. The opposite holds true. In the absence of a due-on-sale clause, existing financing is assumable by the buyers. A buyer who assumes an existing mortgage agrees to sign the note and accept responsibility for repayment of the balance of the loan.

Real estate finance includes the pledge of real property as collateral to back up a borrower’s promise to repay a loan.

TRUE

The nation’s life insurance companies invest approximately one-tenth of their assets in long-term mortgage loans.

FALSE. The nation’s life insurance companies invest approximately one-third of their assets in long-term mortgage loans and participate predominantly in the financing of large commercial real estate developments.

FALSE. Private real estate loan companies usually charge higher interest rates than other lenders in an attempt to offset the risks inherent in their junior lien positions.

Interim loans are designed to finance real estate developments during the planning stage.

FALSE. Interim loans, also known as construction loans, are designed to finance real estate developments during their construction stage.

Leveraging pairs high returns with high risks.

FALSE. Because large mortgages require large payments, rental cash flows need to be carefully maintained at levels adequate to meet these obligations. Any slight rental decrease could adversely affect a highly leveraged investor’s safety position.

All of the following refer to a real estate financing transaction except

AGGLOMERATION. The accumulation of smaller land parcels into one large parcel is called agglomeration which is not a financing transaction.

A seller under a sale-leaseback arrangement benefits from all of the following except

RELEASE OF LIABILITY UNDER THE EXISTING ASSUMED MORTGAGE. An original borrower cannot escape liability of his or her assumed loan until it is paid in full.

With a $60,000 wrap loan payable at 10 percent interest-only around an existing $50,000 loan balance at 8 percent, the wrap holder's annual yield is

20 PERCENT. The 2 percent override plus the 8 percent on the carry back results in a 20 percent yield to the wrap holder.

A wraparound financial encumbrance implies all of the following except

A PRIORITY LIEN POSITION. A wraparound loan implies an existing loan which is in first position.

Which of the following statements about mortgage insurance is correct?

ALL MORTGAGE INSURANCE PROGRAMS ALLOW THE LENDER TO LOOK TO THE INSURER OR GUARANTOR FOR COMPENSATION IN THE EVENT OF A FORECLOSURE DEFICIENCY. Mortgage insurance allows the lender to seek compensation from the insurance entity.

The real estate loan form under which the lender maintains legal ownership is a

CONTRACT FOR DEED. The property's legal fee remains in the name of the lender under a contract of deed form of finance.

When an institutional lender makes an 8 percent real estate loan while it is paying an average of 5 percent to its depositors, the lender is actually earning which of the following returns on its investment?

INFINITE. Lenders earn profits on their depositors' money which results in their earning infinite returns

The losses sustained when selling an investment property must first be deducted from any capital gains made in the year, with any excess losses

ALLOCATED TO SHELTER ACTIVE INCOME AT THE RATE OF $3,000 PER YEAR . Excess capital gains losses can be carried forward to shelter ordinary income until used up.

Under the current tax law, capital gains are

TAXED AT 15 PERCENT IF THE PROPERTY HAD BEEN HELD FOR MORE THAN 12 MONTHS AT TIME OF SALE. The current tax law reduced the tax on capital gains to 15 percent.

Ordinary income consists of earnings from all of the following except

CAPITAL GAINS. Ordinary income does not include capital gains.

By definition, portfolio income includes all of the following except

INVESTMENT SALES PROFITS. Portfolio income does not include income from investment sales profits.

A commercial property was purchased for $100,000 with 20 percent allocated to the land. At a straight-line depreciation rate of 2.564 percent per year, what is the adjusted book basis of this property at the end of the tenth year?

$79,490. The adjusted book basis is $79,490.

Which of the following is the installment factor for a property sold for $100,000 net subject to a loan balance of exactly $40,000 with an adjusted basis of $60,000?

66 2/3 PERCENT. The installment factor is 66 2/3 percent.

On improved income property, all of the following are allowable expense deductions except

PRINCIPAL PAYMENTS. The principal paid on the debt payments is not a deductible expense.

When investment property is sold for less than its remaining book value, its depreciation was

UNDERESTIMATED. If an investment property is sold for less than its adjusted book value then the depreciation was underestimated.

Passive income is derived from which of the following?

INCOME FROM RENTALS. Rental income is defined as passive.

When an investment property purchased for $150,000 is refinanced with a new loan for $175,000, the $25,000 is

NOT TAXED UNTIL THE PROPERTY IS SOLD. Profits from refinancing are not taxed until the property is sold.

The existence of an underlying encumbrance poses a serious threat to the purchaser of an individual lot if the promoter does not make payments as required.

TRUE

The location of land determines its potential future growth in value

TRUE

Because the economic position of a building owner is more vulnerable than a vacant lot owner, the landowner who solicits a tenant on a build-to-suit basis will negotiate rather firmly for a lease that will completely satisfy investment requirements over t

TRUE

The IRS requires that several criteria be met for a farm or ranch to be considered for-profit, one of which is that the activity must be the owner's or operator's main source of income.

TRUE

The value of land is based entirely on its productive capacity.

FALSE. The value of land is not based merely on its productive capacity. Depending on intended use, location can become the key factor in determining value. Land speculators are not as concerned with soil fertility as they are with locational advantages t

Opportunity costs for the equity invested in land are obvious and only rarely overlooked.

FALSE. Opportunity costs for the equity invested in the land are all too often ignored. While the interest paid on a debt can be easily identified as a cost for maintaining the investment, the interest not earned on the cash invested in the property must

Rezoning land to a more intensive use rarely raises the value of the property, sometimes dramatically.

FALSE. To the contrary, rezoning land to a more intensive use usually raises the value of the property, sometimes dramatically. Successful rezoning requests are based largely on the subject property being located in an area of use compatible with that bei

Anyone dealing with foreign investors must report cash payments of $10,000 or more to the IRS.

TRUE

A parcel of land’s physical features may be economically advantageous to one owner and disadvantageous to another.

TRUE

The evaluation of raw land depends largely on its present use.

FALSE

What is the value of acreage producing 6,000 bushels of grain per year worth $10 per bushel, with a cost factor of 50 percent and a market capitalization rate of 10 percent?

$300,000. The value of this property using the income approach is $300,000.

Vacant lots are purchased by investors for all of the following reasons except to

SHELTER INCOME TAXES WITH DEPRECIATION ALLOWANCES. Land is not eligible for depreciation allowances.

Of the following, the property that will generally develop the highest rental rate is

A NEW STORE BUILDING CONSTRUCTED TO SUIT A SPECIFIC TENANT' S NEEDS. The highest rents are paid for properties built to suit.

From a locational point of view, a growth in value over time would most likely occur in land

NEAR AN INTERSTATE HIGHWAY. Land located near an interstate highway will most likely increase in value over time.

Agglomeration, or plottage, is based on the principle

THAT THE WHOLE IS MORE VALUABLE THAN THE SUM OF ITS PARTS. The value of a parcel of land put together from smaller parcels is worth more than the sum of the value of the individual parcels.

When discussing the quality of land, all of the following are included except

THE TERMS AND CONDITIONS OF ITS PURCHASE AND SALE. The terms of sale are not a quality of land.

Of the factors affecting a parcel of land's future growth in value, the one that is generally considered most important is

Owner-occupied homes meet the full criteria for a real estate investment.

False

Condominiums and duplexes compose the greatest number of individual investments in the real estate inventory.

False

The FHA and VA reject condominiums for their insurance and guarantee programs.

False

The provisions of the Civil Rights Act (Title VIII—Fair Housing) do not apply to single-family homes sold without the services of a real estate broker, single-family homes rented by an owner who does not own more than three such houses at the same t

True

The Fair Housing Act is a federal law, and as such it is implemented at the federal level.

False

Under the provisions of Section 216 of the IRS Code, a cooperative shareholder may deduct from taxable income the monies paid for proportionate shares of the property taxes and interest paid on the corporation’s indebtedness.

True

The most profitable detached-house investments are usually those located on potentially rezonable lots.

True

A cooperative is a union of members formed for the achievement of a mutually satisfactory goal.

True

Even when a tenant neglects or refuses to pay rent when due, or when a tenant violates any provision of the lease, the landlord is legally forbidden from reentering and taking possession or commencing an action for recovery of the leased premises.

False

The formation of a condominium requires the filing of a declaration of intentions including provisions for all of the following except

CREATION OF SINGLE MASTER MORTGAGE. Condominiums each have their own mortgage.

All of the following are exempt from the provisions of the Fair Housing Act except

private owners of four or more houses.

The Fair Housing Act extends its coverage to include all of the following except

ELDERLY PERSONS OVER 62 YEARS OF AGE. Fair housing laws do not protect the elderly.

An apartment tenant with a lease that stipulates "The rent shall be $500 per month for one year starting March 1" moves out on June 15 during the term of the lease. The landlord is entitled to recover which of the following amounts?

$0. The language of this lease is not legally enforceable. It is fundamental to the establishment of a viable lease agreement that the rent to be paid be stipulated as the total amount for the entire lease period. If the lease stipulated that "The re

All of the following single-family housing units are considered true real estate investments, except the house bought for

OCCUPANCY. Houses purchased to be lived in are not investments in the true sense of the word.

The conversion of a rental apartment project to a condominium includes all of the following procedures except

EVICTING ALL THE PRESENT TENANTS. When converting an apartment project to individual condominiums, the investor would not evict the present tenants.

A taxpayer in the 28 percent bracket is entitled to a $1,000 tax credit. If the tax obligation is $7,800 before the credit, how much will it be afterward?

$6,800. A taxpayer obligated to pay $7,899 income tax will only pay $6,800 after applying a $1,000 tax credit.

Office rent schedules are generally established on a base rate plus extra charges for special services.

True

A highly efficient building should generate a commensurately high gross annual rent, but this is not always the case.

True

A tax clause stipulates that the tenant will be protected from having to pay increased taxes over the base year.

False

The special requirements involved in clinic construction, including ceiling-to-floor partitions, greatly exceed the costs of other forms of office construction.

True

When trying to attract new tenants, simply decreasing the rent for the office space is always the most effective rental concession.

False

Most office leases assign utility costs to the property owner.

False

One of the disadvantages of condominium office ownership, in addition to controlled occupancy costs, is the possibility of equity growth through mortgage principal pay down plus increasing value.

False

In the development of many new commercial real estate projects, including high-rise office buildings and office parks, the financing pattern requires that the investment’s break-even point be met by advance lease commitments from creditable tenants.

True

The areas utilized for an entry lobby, hallways, stairwells, elevator shafts, bathrooms, storage bins, and the like are considered productive in terms of generating cash flows.

False

Small offices tend to be difficult to rent on long-term leases.

True

Which of the following definitions is correct?

SUBLEASING CLAUSE: THE TENANT HAS THE RIGHT TO RENT HIS OR HER OFFICE SPACE TO SOMEONE ELSE. This is a correct definition.

MAJOR ARTERIAL LOCATIONS ARE NOT OF PRIME IMPORTANCE. Small office buildings can be located everywhere.

In terms of requirements for a company's headquarters location, which of the following received top priority in a survey run by BOMA?

LARGE FUNCTIONAL SPACE. Most large companies deciding on a location for their headquarters will require a building offering large functional space.

Small, lowrise office developments are generally designed

TO SERVE THE NEEDS OF THE NEIGHBORHOOD. Small office buildings are designed to serve neighborhood needs.

The establishment of a rental schedule for an office building depends least on which of the following?

THE OWNER'S DESIRED RETURN ON THE INVESTMENT. Potential tenants will pay market rents, not necessarily what the landlord requests.

Rental concessions usually include all of the following except

LOWERING THE RENT. Rental concessions do not include lowering rent, which would disturb the financing arrangements on the project.

To pay for the costs of maintaining the parking area and joint walkways, community shopping center tenants are usually charged a common-area fee in addition to their rent.

TRUE

A neighborhood shopping center is usually situated on a four-acre to ten-acre site and normally serves a trade-area population of 5,000 to 40,000 persons within a six-minute driving distance.

TRUE

Regional shopping centers generally range in scope from 300,000 to 1,000,000 square feet of gross leasable area on at least 30 acres of ground and serve a trade area of 150,000 to 400,000 or more people.

True

The owner of strip store buildings usually finds that the success of the investment is very much a function of the success of the tenants as entrepreneurs.

True

Community shopping centers grant tenants the same exclusivity for their lines as do neighborhood centers.

False

Most strip store leases are designed to run six months to one year with options to renew included to protect the tenant.

False

Lease terms for major tenants usually range from 15 to 20 years, whereas local tenants’ leases may range from only 5 to 10 years.

True

Regional shopping centers typically are anchored by a food market.

False

Only the largest regional shopping centers require a full-time manager.

False

A community shopping center typically devotes approximately 10 percent of its space to a supermarket, 5 percent to a major general merchandise tenant, 50 percent to other clothing and shoe retailers, and the balance to other kinds of merchandisers and ser

False

The small investor is attracted to strip store buildings for all of the following reasons except

OFF-STREET PARKING CONVENIENCES. Strip store parking is usually on the street.

All of the following statements are correct except

COMMUNITY SHOPPING CENTERS SERVICE A TRADE-AREA POPULATION OF MORE THAN 400,000 PERSONS. A community shopping center serves an area of from 40,000 to 150,000 persons.

When a commercial tenant has the right to extend the lease at a price and terms established at the time of the lease inception, the lease provides for

AN OPTION TO RENEW. An option to renew a lease allows a tenant to extend the lease on agreed terms.

Most strip store leases are drawn for

THREE TO FIVE YEARS. Strip stores attract tenants for relatively short time periods of from three to five years.

Shopping center common-area fees are utilized to pay all of the following costs except

COMMON-AREA PROPERTY TAXES. Common area fees in a shopping center usually pay for promotional advertising, parking area maintenance and common area utilities, but not common-area property taxes.

The type of shopping center that includes office towers and apartment buildings in its design is a

SUPER-REGIONAL CENTER. A shopping center that includes apartment and office buildings in addition to an enclosed mall area is called a super-regional shopping center.

With an industrial park development, it is not necessary to provide much flexibility in the layout plan.

False

Industrial real estate is usually owned by the manufacturer who occupies and uses the space.

False

A concern for the health of citizens has led community regulatory agencies to require that industrial activities that create noise, smoke and waste be isolated in designated areas, preferably as far away from homes as possible.

True

Most municipalities have passed laws forbidding the waiver of property taxes, even when the waiver would serve as an incentive for a company to invest in the community.

False

Generally speaking, two types of persons require self-storage: persons living in homes without basements and persons moving into or out of spaces who need temporary storage.

True

There is only one type of industrial lease: the net lease.

False

More so than in any other form of real estate investment, an industrial tenant’s installation of heavy equipment and machinery will ensure the longevity of the tenancy.

True

Special-purpose buildings have certain physical characteristics that limit the scope of their use.

True

It is not necessary to include utility costs in the feasibility analysis of a major project.

False

Industrial park restrictive covenants would usually include all of the following except

A COMMUNITY ENGAGING IN AN ACTIVE CAMPAIGN TO ENTICE MANUFACTURERS FROM OTHER COMMUNITIES TO MOVE INTO ITS AREA. To try and get manufacturing companies to move to your city by offering incentives is called "beggar thy neighbor".

From a community's point of view, the benefits of encouraging the development of an industrial park would include all of the following except

LIMITING URBAN SPRAWL. The development of an industrial park may actually aggravate urban sprawl, not limit it.

Functional obsolescence is most clearly defined as the

OBSOLETE DESIGN OF A BUILDING. A poorly designed building loses value because of functional obsolescence.

Property tax liens are auctioned to investors who buy them for the interest they earn.

True

In the United States, an owner of real property is legally entitled to control the minerals, natural gas, oil, and/or water that lie below the surface of the land.

True

The cost of housing in a mobile-home park is frequently 5 percent to 10 percent less than the cost of conventional housing elsewhere in a community.

False

Mobile home parks tend to be located in isolated areas of a community rather than more congested areas.

True

Junior finance is a relatively low-risk investment.

False

When the baby boomers reach senior status in 2020, the 65 and older group will number 54 million people, 16 percent of the population.

True

A manufactured home rental park is considered a business venture more than a real estate investment.